NBFC Registration - An Introduction

NBFC (Non-Banking Financial Company) is a widely engaged in financial activities like secured and unsecured loans, investments, Marketplace lending or financial Information service provider or any other business objectives as defined under section 45-IA of the RBI Act. 1934 and Companies Act 2013. NBFC does all types of financing business but does not possess a full fledge banking license. An entity who is willing to start loan or investment business is required to obtain Certificate of Registration (COR) from RBI. The RBI has simplified the NBFC Regulation and now licensing process is much easier than it was before.

NBFC specializes in offering both secured and unsecured loans likewise but not limited to Personal Loan, Business Loan,Auto Loans, gold loan, Assets Financing, Acquisition of Shares, Stock, Bonds, Hire-Purchase, Insurance, Currency Exchange, Peer to Peer lending, hedge funds etc.

RBI has established two separate departments for efficient administration and smooth operation of NBFC. Department of Non-banking Regulation and Department of Non-Banking Supervision. Both these department administered by CGM (Chief General Manager level Executive of the RBI).

Growth and Market of NBFC’s In India

The NBFC has been highly innovative in the lending space since the beginning and has played a vital role in the growth of the financial ecosystem, and it has proved more innovative as compared to the bank. The key factor of NBFC success is customized and personalized loan product, quick processing and customer friendly credit policy. During the year 2019, the NBFC Market share was 18.6%. NBFC will continue to maintain its growth if the following factors widely executed in the business.

• Customized Loan Product
• Personalized Customer service
• Leveraging technology
• Use of Digital channel of increasing reach
• Improved and high-level Risk management tools

NBFC Market share is quite low as compared to banks, but still Private lending business has been one of the emerging and profitable business in India.

NBFC help to meet the demand that remains unfulfilled by the traditional banking system in shorter processing time. Despite the slowdown in every industry, we expect that NBFC will continue to maintain its growth rate. The growth factor NBFC will continue, and Profitability will improve because digital lending/ Fintech as the new industry entered in the lending space of the India Market.

Role and Function of NBFC in India

As recognized by the RBI, the specific roles of the NBFC are as below:

• Development of sectors like infrastructure
• Help and increase wealth creation
• Substantial employment generation
• To provide finance economically weaker section
• Helps in economic development
• A huge contribution to the state exchequer
• NBFC provide long term audit and specialized credit
• Helps in the development of financial markets

How is NBFC different from Bank?

NBFC and Banks both are involved in financial activities, but some differences between the two are as follows:

• Act of Regulation- NBFCs are regulated by the Indian Companies Act, 2013, whereas Banks are governed by the Banking Regulation Act, 1949.
• Demand Deposits- NBFCs can not accept the deposits, whereas Banks accept the deposits from their customers.
• Drawing a Cheque- NBFCs cannot issue or draw cheques on its own whereas Banks can issue cheques freely
• Deposit Insurance Facility- The deposit insurance facility is not available for NBFC depositors whereas it is available for bankers

Classification of NBFC by Activity

• Investment Credit Company (ICC)- It is formally known as Loan company (LC), Investment company and Assets Finance Company. With ICC License- you can do lending and Investment.
• NBFC-P2P (Peer to Peer Lending)- Online Platform to collaborate lenders and Borrowers and Manage funds.
• NBFC-AA (Account aggregator)- Financial Information service provider (Bigger Version of Existing CIC companies)
• NBFC-MFI- Credit and Loans to the Weaker Section of the Society
• NBFC-ND and CIC- Investment in shares -Debt in the same group of companies
• NBFC-IFC- Long term debt to Infrastructure companies
• NBFC-Factor- Receivable Financing or Bill Discounting
• Mortgage Guarantee Company- Providing Mortgage guarantee services
• NBFC-Financial Holding- Created for Banking License
• Housing Finance Company- Loan for Affordable Housing

Types of NBFCs on the Basis of Liabilities

NBFC Registration Process

• Register a Company as per Companies Act 2013
• Arrange Capital of Rs. 2 Crore /20 million INR (Minimum capital requirement for an NBFC License)
• Creation of a Fixed Deposit of Rs 2 CR with any Nationalize Bank
• FDI Compliance as per the Foreign Exchange Management Act (FEMA) - in case of foreign investment
• Complete documentation for an NBFC license
• Submission of the necessary documents with FD receipt before RBI
• Visit the site https://cosmos.rbi.org.in for the Online NBFC Registration application
• Download NBFC eform from the Website and Submit Online
• To keep a check on the status of your form or for tracking purpose, you must take note of the SRN.
• Keep a hardcopy of the NBFC Registration form (indicating the online Company Application Reference Number)
• Submit all the necessary documents to the RBI Central office

Eligibility criteria for the NBFC license

According to Section 45(1A) of the Reserve Bank of India for any individuals or company willing to start loan or investment business in India, he/she will require a register a company, hire skilled team and also meet the below pre-conditions prescribed for NBFCs. If an Applicant company qualifies, the legibility criteria can apply for NBFC registration with RBI.

• Directors Profile

  The Directors must have experience in Finance, Credit or Banking.

• NBFC Business Plan

  The Applicant company must have a detailed business plan for the next five years

• Owned Fund

  Shareholders in total must have minimum Rs. 2 Cr as a net owned fund; Invested Capital must not be the borrowed fund.

• Clean Credit History

  All the directors and shareholders must have no write-offs or have not willfully defaulted the repayment of loans or credit fac to NBFC/Bank.

• Quality of Capital

  The Net owned fund of the promotor must be tax paid, and all statutory compliance of the management of the applicant company must be clean and legally acceptable

  

Strategic Factors for NBFC License Success

It takes industry-expert professional acumen to obtain an NBFC license as well as to operate the same. The RBI ensures that the NBFC is operated by best in industry profession possessing necessary expertise and ethical work record. Therefore, it is essential to cover every aspect of the regulatory requirements.

11 Pointer checklist for NBFC Registration

• 1. MOA of the NBFC Company

  The object clause in the MOA must be inlined with the Business Plan

• 2. Certified Copy of Registration Certificate

  The Founders are required to obtain a certified copy of MOA and AOA

• 3. Income and Identity test

  The Promotors and Shareholders require to qualify the quality of Capital test and also prove that general conduct of Promotors is always good.

• 4. Net worth Certificate

  Get a net worth certificate of Directors, Shareholders, and Company

• 5. Clean Banker Report

  Banker report about the initial fixed deposit of Rs 2 Cr with the no Lien remark.

• 6. Highest Education Proof

  Certification of educational/professional qualification of the directors of the Applicant Company

• 7. Credit report of Directors and shareholders

  Latest credit reports of Shareholders as well as of directors are required.

• 8. Experience in the Financial sector

  Make sure to appoint at least one director with experience of 10+ years in the sector of financial services.

• 9. Underwriting model

  Submission of a detail action plan about the loan products, fair practice code, Technology, credit and risk assessment policy.

• 10. Organization Matrix

  Need to provide organizational structure and decision-making process for approval/rejection of loan application

• 11. System and IT Policy

  a. IT and Data Security Policy

NBFC Registration with RBI

The founders are required to follow both offline as well as online NBFC application process to obtain the NBFC license. The Reserve bank of India is an autonomous body, and it has two separate departments to regulate and supervise the function of the NBFC.

DNBR (Department of Non-banking Regulation)

The DNBR is responsible for conducting the Fresh NBFC Registration process as well as is responsible for preparing the regulation and Polices for the NBFC. The DNBR has transparent and innovative assessment process of NBFC Application.

The DNBR will send you an email and a formal notice if they need any additional documents during the NBFC registration process. The RBI expects your submission/response to the given notice within 7/15/30 days as per the NBFC regulations.

• Assessment of Application Submitted for NBFC License (All Category of NBFC)
• Investigation of Directors / Shareholders Profile
• Communication with Applicant Company in Pre-Registration Process
• Communicates Final Decision to the applicant company with the Approval of Executive Director office (RBI)
• Regulates & Administer NBFC Business in India
• Publish Notifications, Circular & Order for NBFC

DNBS (Department of Non-Banking Supervision)

• DNBS is responsible for post-registration compliance of the NBFC's and other administrative issues.
• After Approval from DNBR (Department of Non-banking Regulation) collects net owned certificate & bankers report – before they issue you the NBFC License (CoR) in Original
• Responsible for complying the NBFC Rules and Regulations issued by the RBI
• Conduct Audit / On-site inspection from time to time
• Suspend / Cancel NBFC License in case of Non-Compliance with the Laws
• Educate and conduct a seminar for the general awareness about the NBFC Regulations, Compliance and Business.

What are the Steps in the NBFC Registration Process?

Before filing the application for COR (Certificate of Registration), one should read the following checklist of NBFC registration Process.

Step 1 – Hire NBFC Registration Consultants

• Experience Matters

  Select an experienced consultant experience in NBFC & Banking laws with Minimum 10+ years.

• Credibility

  An NBFC Consultant firm should have a good team size of 100 to 150 with a combination of professionals like CA, CS, Senior Bankers and Lawyers.

• Verify Reference

  The reference check is important in case you engage a consultant who does not have expert knowledge of NBFC regulation. It may lead to rejection of the application by the regulator.

Step 2 – Business Plan

• Founders and Executive Summary
• Loan Product Plan for 5 Years
• Credit and Underwriting process map
• SWOT Analysis
• Credit & Risk Model
• Competitors Analysis
• Lending model – Digital / Branch Model
• Financial forecast

Step 3 – Application for CoR (Certificate of Registration)

• The middle name of the company must have Finance, Finserv, Final, Investment, Capital, Fintech, and Leasing etc. For Example, Enterslice Capital Private Limited
• Create a Fixed Deposit of Rs. 2 Cr with a scheduled commercial bank
• Verify the backgrounds of promoters
• Necessary documentation for obtaining an NBFC license
• Submit an online COR application on the Website of RBI (COSMOS); thereafter a CARN will be generated
• Physical submission of application with the regional department of RBI
• RBI will scrutinize the submitted application and COR will be issued.

Benefits and Business Opportunities after NBFC registration

The business environment in India is favourable for NBFC for their exponential growth. Financing business in India is highly regulated by the Reserve bank of India. Hence NBFC registration offers many benefits. A Registered NBFC helps to gain the confidence of borrowers, offers you the security of capital invested in the business.

• Lowest Legal and Business risk
• Higher confidence of customer after Grant of NBFC license
• Easy to Raise Investments in NBFC
• Access of CIBIL/Other Credit Bureaus data
• Open Interest Rate without any Cap
• Free to charge Processing Fees–No Cap
• Protection by law for recovery of loan
• Easy Bank Finance
• Up to 100%, FDI Allowed
• Leverage of technology and Low Operation Cost
• A decline in NPA/ Bad Loans due to credit reporting to Bureaus

Factors of Success for NBFC

RBI Regulations for Non-Banking Financial Companies

The certain compliances are followed after the NBFC License process is completed. There are various guidelines, circulars, and notifications, from the RBI, published in the public domain from time to time, which required to be complied with mandatorily, such as:

• Statutory Audit
• Income Tax Returns Filing
• Tax Audit
• GST Returns Filing
• ROC Returns

NBFC Multi Regulator Model

Unlike UK,India works on a multi-regulator model. There are certain class of NBFCs regulated by other regulators than RBI.

All other Compliances/Returns required by a competent authority.

• RBI compliance for NBFC
• Adoption of Fair Practice Code
• Secretarial compliances
• CIC Registration
• C-KYC Registration
• COSMOS Registration
• CERSAI Registration
• FIU-IND Registration
• File NBS-9 on COSMOS, the online platform of RBI
• Compliance of KYC Anti-money Launderings.

Fresh NBFC Registration vs. Takeover of NBFC

Applying for new NBFC Registration online with is always a better option than a takeover of NBFC. The registration of NBFC is simpler than before. This is especially for Foreign Companies, who intends to enter into the Indian Financial service market.

We always advise them to apply for the new NBFC registration application instead of buying existing NBFC.

Advantages of Fresh NBFC Registration above NBFC Takeover

• Low Legal Risk

  In case of NBFC takeover, past Non-compliance of the target entity with the RBI Act may lead to cancellation of the NBFC License.

• Timeline

  Fresh NBFC Registration can be executed in a period of 90 to 120 days, whereas an NBFC Takeover usually takes 150 to 300 days.

• Title Risk

  There is no risk of ownership after the new registration of NBFC. You are the first shareholder of the company while in case of existing NBFCs, you will be unable to establish the precise title of shares.

• Tax Liability

  Entities are responsible for a tax liability of existing NBFC they are willing to take over.

• Capital

  In case of new NBFC License application, you may need to block your Rs. 2 Cr / Rs. 20 Million FD in Bank Account. However, the proposed shareholders are required to submit the bankers report in a case of NBFC takeover. The report should state that the bank balance is equivalent to the book value of the shares.

Risk Management Process

What are the Benefits of Fintech Based NBFC Business Model?

The integration of new age technological advancements with financial business operations is reaping numerous benefits to the economy. There are many advantages to doing so, such as:

• Addressing customer problems using technological advancements
• Online loan facility
• Working on financial inclusion app
• Creating space for the alternative digital banking system, disrupting conventional business models facing significant legacy issues
• Use of Big data, AI & Machine learning tools to minimize the fraud

Benefits of Fintech Based NBFC as an Alternative Lending Model

• Reduction in Operation Cost

  Fintech based NBFC make extensive use of the technology and IT infrastructure. Hence, the operating cost reduces significantly.

• Broad Reach

  Fintech NBFC can target a diverse pool of customers beyond geographical limitations. This advantage is outside the scope of the conventional banking system.

• Higher ROI

  Fintech based NBFC has a higher fund cost in comparison to a bank. However, it enjoys a lower customer acquisition cost and lower servicing cost than banks.

• Lower NPA than Bank

  As per the prominent market experts NPA of NBFC’s is lower as compared to bank.

Penalty for Non-compliance as per RBI regulation

The Reserve Bank has the authority to impose a penalty on NBFCs for violation of the provisions under the RBI Act. Such penalty is as follows:

• The business when carried without a certificate of registration, the Reserve Bank can impose a fine of not less than one lakh rupees which can extend up to Rs. 5 lakh or twice the amount involved in such contravention, whichever is more.
• The business carried without a certificate of registration is an offence which is punishable with imprisonment of not less than one year.
• If the default is continued by the company, then penalty imposed up to Rs.25,000 per day after the first day of such default.
• In case of any other contravention, a fine imposed of a maximum of Rs. 5,000 by the Reserve Bank.
• If there is non-compliance with the orders of the Company Law Board is punishable with imprisonment up to three years and a fine of not less than Rs. 50 every day during which such non-compliance continues.
• If any auditor fails to comply with any direction given by the Reserve Bank, he will be punishable with a fine up to Rs. 5,000.

Why Enterslice?

• 400 + NBFC Clients
• 100+ Fresh NBFC Registration
• 300+ Team of CA/CS/Ex-Banker
• 500+ Cities Served
• 24X7 Customer Service
• 9 Customer Score
• 98% SLA Delivery

If you have any additional questions, please feel free to write at info@enterslice.com or fill the enquiry form as mentioned above, we shall get back to you.

Enterslice Advisory Services for NBFC?

• Advisory for Fintech Based Digital Lending businesses
• Assistance in the SOP of the Organization
• Assistance in designing loan product
• Finalizing reporting formats from various verticals of the organization
• Assistance in developing Company Policies
• Virtual CFO Services for the NBFC
• Providing Assistance to the founders in the preparation of the market strategy
• Assistance in the fundraising process
• Assistance in meeting secretarial compliances
• Assistance in meeting RBI Compliance
• Advisory on Adoption of Ind-AS and IFRS
• Internal Audit Services

How Enterslice will help you to get NBFC Registration?

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